Australia ‘well positioned’ to handle turmoil

Washington, August 6, 2011

Australia is well positioned to handle a severe global financial market disruption and has ample room to cut its policy interest rate if world growth falters, the International Monetary Fund said on Saturday.

The Australian central bank on Friday postponed plans for a rate hike after a massive global market sell-off late last week, the worst since the 2009 financial crisis.

In a quarterly statement, the central bank expressed concern over the sovereign debt problems in Europe and the US and the possibility of another global recession.

"There is ample scope to cut the policy interest rate and provide liquidity support for banks," the IMF said in its annual health check of the Australian economy.

It said the Australian dollar was overvalued somewhere between 10 and 20 per cent but noted the currency would probably depreciate if global conditions deteriorated.

The Aussie dollar suffered heavy losses on Friday and was among the week's worst performers in major currencies after investors fled to the safety of cash and bonds.

Still, the IMF said that if a global recovery does stay on track, Australia would likely need to raise its policy interest rate to contain inflationary pressures caused by the impact of its mining boom.

Without further monetary tightening, inflation would rise above the central bank's 2-3 percent target band in 2012, the fund said.

"The (central bank) should guard against inflation expectations becoming anchored at too high a level," the IMF cautioned.

The IMF forecast Australia's economy would grow 2 per cent this year and 3.5 per cent next year.

The Australian government has projected the economy will grow 3.25 per cent this year, compared with an earlier estimate of 4.25 per cent. It has kept its upbeat growth forecast of 3.75 percent for 2012 and 2013. – Reuters